Tuesday, June 19, 2007

Personal finance is about numbers. And working with numbers means you'd better be able to do math. I know it intimidates a lot of people. They grit their teeth all through school, eagerly awaiting the day when they will no longer have to do math. They take their SATs thinking "Ugh, when am I ever going to need this stuff in the real world?" I actually have a secret yen to become a question-writer for the math section of the SAT, because really, who's sitting around saying "If I have 10 marbles and my brother has half as many marbles..." If that were truly the case, the siblings would either just count their marbles or be too busy beating each other up to care. I can think of much better real-world questions to engage today's students in practical problems they might one day have to solve, such as this one:

Mary is on the Amtrak Acela train. She goes to the cafe car and buys the cheese & cracker plate and some wine, for a total of $8.50. She gets 4 pieces of cheese, and 4 packages of crackers. 2 of the packs of crackers have 3 crackers each, and the other 2 packs have 2 crackers each.

Questions:1) Into how many pieces must Mary cut the cheese in order to have an equal amount for each cracker?*2) Can you think of a good joke to make about "cutting the cheese?"3) How much wine did Mary get? It must have been cheap. Should she go get a couple more?

Actually, I suppose those aren't appropriately multiple choice. But to get back to broader personal finance concerns, I think it's very important not to be innumerate. You don't have to know calculus or trigonometry to manage your finances. All you really need is the ability to do basic arithmetic, and at least some understanding of a few other general math concepts.

Why? Here's a few very practical reasons:

Getting change: can you look at the change you've just been given and be sure you got the right amount even if it's not spelled out on your receipt?

Prices: what if the little "unit cost" sticker is missing from the supermarket shelf? Can you tell which size of a product gives you the best value for your money?

Discounts: do you know how much an item is really going to cost you if it's 30% off, plus an additional 10% off the already-reduced price?

Interest: can you figure out how much more you'll earn a year if you move your money to a different savings account with a higher interest rate?

Medians and averages: if you've got 9 people who make $10,000 a year and 1 person who makes $10,000,000 a year, the average income of that group is $1,009,000. But the median is only $10,000. That is an important difference to remember when reading any kind of economic statistic.

Some of these may seem like silly little things, and you may think it's still not that important to be able to do some basic math in your head. You may use a calculator for everything, or an Excel spreadsheet. And these are wonderful tools which I highly recommend using! But tools are only as good as their users: it's very easy to make mistakes using a calculator, and especially Excel. Your own sense of what an answer should be can sometimes help you catch an error that may be buried in a formula in a spreadsheet.

You may say "but I'm just not comfortable doing math in my head. I don't have that kind of brain." That is perfectly understandable. I personally can't do it all that well, and have always been jealous of people who are better at mental math. But sometimes it's not about calculating an exact number in your head, it's just knowing the range the answer should fall in. I remember being shocked, at one of my earlier jobs, when I had to show a spreadsheet to a high-ranking financial guy. I forget exactly what issue we were trying to resolve, but I said something about how if we changed a certain percentage in one place, another number would be about 30% higher. He stopped, said "uh, um," a couple times, tapped a few numbers into a calculator and then said, "yeah, you're right." I just found it so bizarre that this guy had risen to a very senior level of managing a company's finances without being able to get his head around what was a pretty straightforward bit of mathematical estimation.

How can you improve your numeracy? Here's a few ideas:

Practice: challenge yourself to do little bits of math in your head, while balancing your checkbook or when paying for things in stores.

There may be adult education classes in your community that are targeted towards practical math. They may even be free.

More practice: even if you're comfortable with basic math, it never hurts to keep exercising that part of your brain and learning new skills. Instead of using online calculators to figure out your mortgage payments or retirement plans, build your own spreadsheets and play around with them.

Remember, you don't have to actually take the SATs anymore. Think about learning math as just one more nifty little way to improve your financial life. Pretty soon, you may even think math is fun!

*As for Mary's problem, the answer is 5: there are 10 crackers, so each of the 4 cheeses has to be cut into 5 equal pieces to make 20 little nuggets of cheese which can then go 2 each on the crackers. I think a proper explanation would have something to do with least common multiples. But good luck actually trying to divide those little cheeses evenly into fifths! I think Mary usually simplifies matters by ditching two of the yucky Wheatsworth crackers, which crumble too easily, and anyway, she's still on Atkins.

10 comments:

Sisters ALWAYS have more marbles than their brothers!Great post. ANother calculation to make, based on Your Money or Your Life, when deciding whether to spend x on Y: How many hours will it take me to pay for this item in post-tax dollars? That can be a quick turn off. (Or have the opposite effect if you're well-paid.)

We run a summer concession business and hire about six cashiers to front the store. My concern is that the newer cash registers are programmable and they ring up the change that the customer should receive. There is no math being done in anyone's head. Still, I try to train the cashier to count the money back to the customer so that maybe, just maybe, there will be some connection made to what comes in and what goes out. I think this problem is connected to the constant pressure you can feel in the check out line to hurry up for the next customer. We are all rushing far to fast to actually take the time and do the math.

I would have cut each piece of cheese into 3 pieces. No not equal thirds :) Cut 2 pieces that are 2/5 of the chunk, leaving a piece 1/5 of the chunk. That gives you 8 pieces total that are 2/5 of a chunk, and 4 pieces that are 1/5. Just pair up the 1/5 pieces for your last 2 crackers. Less cutting and easier to handle! :)

Continuing with the idea that personal finance is about numbers I think it is more relevant to reframe the question of the cafe car meal into what Mary could save over time if she passed on the wine and brought the cheese and crackers from home. A similar snack could be created in a few minutes and cost a buck or two. If Mary is traveling on the train once a week, over the course of a year she could save hundreds of dollars (52 x 7 = $364).

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About Me

My name is Madame X, and I am a 40-something single woman living in New York's lower Hudson Valley. I write about how much money I make, what I spend it on, how much I save, how I budget, my home-buying experiences, my financial goals and ambitions, my thoughts on class and what it means to be rich or poor, and anything else that relates to money. (More about me here, here, and here.)If you take any of my advice, do so at your own risk as I am not really qualified to give it. If you have advice to share, please do, and many thanks!